The Second Wave

3:57 pm, 2/19/10

Last month, the New York Times finally caught on to the idea that mortgage relief, long billed as a noble effort to help people hang on to their homes, may have actually made things much worse, duping struggling families into wasting more money on assets that were doomed from the day they signed the mortgage.

As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.

"Then the carpenters can go back to work," Mr. Katari said. "The roofers can go back to work, and we start building housing again. If this drips out over the next few years, that whole sector of the economy isn’t going to recover."

Now, this week, comes the equally shocking discovery that subsidizing more home sales isn't going to help, either.

Elkhart also symbolizes the failure of federal efforts to turn around the housing slump at the heart of the economic crisis. Housing in this community has become almost entirely dependent on a string of federal support programs, which are nonetheless failing to prevent a fall in prices and a rise in mortgage delinquencies.

More than one in 10 mortgage holders in Elkhart is seriously behind on payments. The median sales price has plunged to the level of a decade ago. Many homeowners owe more than their home is worth, freezing them in place for years. Foreclosures recently hit a record.

To the extent that the real estate market is functioning at all, people here say, it is doing so only because of the emergency programs, which have pushed down interest rates on mortgages and offered buyers a substantial tax credit.

Equally important is an expanded mortgage insurance program run by the Federal Housing Administration, which encourages private lenders to accept borrowers with small down payments. The government takes the risk of default.

A few years ago, only one in 10 buyers in Elkhart used the housing agency program. Now about half do. Across the country, the agency has greatly expanded its reach so that it now insures six million mortgages.

I've said it before, and I'll say it again: politicians talking about how to "fix" the housing market are defrauding Americans. The crash was the fix, and these efforts are only desperate fights to pump some air back in to the bubble, prolonging the agony and racking up more public debt that we have no foreseeable means to pay back.

The terror of the moment, however, is what will happen when this temporary aid ends:

The first step could happen as early as next month, when the Federal Reserve has said it will end its trillion-dollar program to buy up mortgage securities. That program has driven mortgage interest rates to lows not seen since the 1950s.

Yet it is uncertain whether the government can really pull back without sending housing markets into another tailspin. "A rise in rates would kill us all by itself," Ms. Swartley said.

The Obama administration has offered few ideas about reforming the housing market. Proposals for the future of Fannie Mae and Freddie Mac, the mortgage holding companies taken over by the government at the height of the crisis, were supposed to be introduced with the president’s budget this month. They were not.

One thing they have been successful at, though, is getting a few people into more homes that they can't afford:

Heather Stevens, a 23-year-old nurse here, is closing on a three-bedroom house this week. Since her loan was insured by the Federal Housing Administration, she had to put down only 3.5 percent of the $74,900 purchase price.

Stevens had to come up with only the $2,600 down payment, which still took all her savings. But the best part is the $7,500 tax credit. She will use that to remodel the kitchen. "If it wasn't for the credit, we would have waited to buy," said Ms. Stevens, who is getting married this year.

Thanks, Congress!

Since she's just wiped out her savings, she might want to think about putting that in the bank, because there's a good chance that when these programs end, her new home's value will resume its downward spiral.

Oh, and about commercial real estate?

"I think we'll see slow improvement this year," said Mac Wilson with Thalhimer/Cushman & Wakefield. "It can't get any worse."

In the movies, that's always what somebody says just moments before it gets worse.